Amid job fears, debt, consumer thrift slows recovery

— -- Consumers are still missing in action as the economy shows signs of recovery.

No wonder: Their incomes are being squeezed, and they're worried about their paychecks after seeing 6.7 million jobs vanish since the recession began in December 2007.

"We've adjusted our finances in a draconian way," says Rick Shultz of Medina, Ohio, who works in auto sales. This year, he passed up an every-two-years golf trip to Scotland and suspended his country club membership. "I even pack my lunches most days."

Consumer parsimony threatens to keep an emerging recovery from taking full flight. Consumer spending accounts for about 70% of U.S. economic output. "The behemoth, the juggernaut is consumers," says Carl Riccadonna, senior U.S. economist at Deutsche Bank. "But the buying power is not there. … The consumer is pretty tapped: They're facing wage pressure, they've borrowed to the hilt, they've suffered financial losses."

Consumer spending blipped up 0.2% from June to July, lifted largely by the government's cash-for-clunkers auto program, the Bureau of Economic Analysis reported Friday. Toss out durable goods, including cars, and consumer spending actually fell 0.3%.

Personal income, including wages, interest income and payments from the government, was flat from June to July. Wages and salaries dropped a record 5.1% from July 2008. The only good news: In July, wages rose 0.1% from June, the first increase in nine months.

Even those who feel secure in their jobs continue to be cautious about spending. "I realize that layoffs can happen at any time," says Atlanta marketing manager Madeline Wong. "With that in the back of my head, I'm not planning any big expenditures … so no plans to buy a new car or furniture."

Charles Sherman, a Bella Vista, Ariz., entrepreneur, is slashing debt — he wants to pay off the $70,000 he still owes on his mortgage within five years — and cutting back on little indulgences such as his Netflix membership and weekend getaways. Following Sherman's example by slashing debt makes sense for a lot of families: Household debt peaked at $13.9 trillion last year. But it poses a problem for the economy. "We economists call it the paradox of thrift," Riccadonna says. "Consumers need to save to repair their balance sheets. But if everyone saves, we're in big trouble. Economic activity grinds to a halt."